Changes Anticipated in Taxes Under the Trump Administration
Barbara Snapp Danberg, Esquire
There is much in the news concerning changes in tax laws under the Trump administration. It appears that tax changes are coming and if they are going to pass it will likely be before the August 2017 recess of Congress.
The Trump Tax Plan is similar to the Republican Tax Plan and where it had differed, it has changed overtime to line up more consistently with the Republican Plan. This summary primarily evaluates the Republican Plan, as to Individual Tax changes, Corporate and Business Tax changes, and Estate and Gift Tax changes.
The Plan proposes to reduce the number of tax brackets from seven to three and the rates will be 12.5%, 25% and 33%. The rate of 12.5% will apply up to $50,400 of income, the rate of 25% starting at $50,400 up to $210,800 and a rate of 33% for incomes at $210,800 and up.
In addition, the standard deduction would be increased from $6,300 to $12,000 for individuals, and $18,000 for heads of household. This is in exchange for elimination of the personal exemption of $4,000 +/- per person. A family of two parents and two children loses $16,000 of exemptions in exchange for a standard deduction increase of $5,700. All itemized deductions would be eliminated except mortgage interest deductions and charitable contributions. Most significantly this includes eliminating a deduction for state income and real estate taxes. In addition, alternative minimum tax (“AMT”) will be eliminated or capped at $100,000.
If this structure passes, what will become important in planning is looking at mortgage interest and shifting expenses currently deductible to a home equity line of credit or to refinance to increase this deduction and keep best practices records of charitable deductions. Keep in mind, the loss of deductibility of state real estate and income taxes has been proposed several times only to fail in Congress. Overall, the effect is a lower rate of tax for most; although, with the loss of personal exemptions, families with more dependents may find their actual taxes owed may increase or remain flat.
The Republican Plan proposes to reduce the corporate tax rate from 35% to 20%. This is a significant shift and will make us reconsider choice of entity, because pass through entities will be less tax advantageous, although with blended rates, taxpayers may pay an overall rate of less than 20%. Higher income business owners may see a tax reduction overall by changing to a C Corporation rather than an S Corporation or LLC. This entity choice will need to be reviewed individually with us if this rate change occurs. Those who are on the fence about whether to incorporate may choose to do so if entity rates become lower than individual rates.
Estate Tax & Gift Tax
The Plan eliminates the Estate and Gift tax but also eliminates stepped-up basis to fair market value as of the date of death, on assets over $1 million. What this means is if your vacation house was purchased at $150,000 and at death is valued at $1.5 million, currently at death the basis for heirs would be stepped-up to $1.5 million and at the sale, no capital gains would be realized if the property sold at fair market value. However, under the new proposal, the gain over $1 million would be subject to capital gains, so $500,000 would be taxed at 20%. If the Republican Plan passes, a review of tax basis, who should own the title at sale and keeping records of improvements will become more important. In addition, 1031 like kind exchanges will become more significant.
Our firm will monitor the status of the proposed changes and may recommend that you sit with us to review changes that may help your tax picture.
If you wish to meet and review your specific situation please contact Jennifer Healy to schedule an appointment.